1. Employee Benefit Trusts and Succession Planning
Corporate Finance
Employee Benefit Trusts and Succession Planning
16 September 2016
Presented by Garry Karch, Managing Partner
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2. What is an Employee Benefit Trust (EBT)?
Corporate
Finance
What is an Employee Benefit Trust (EBT)?
Discretionary trust into which a company can place shares or other assets for the benefit of employees
May be used to provide employee benefits or as a succession planning tool
Also useful as internal market for shares of private companies
In succession planning context, assets held are generally shares of sponsoring company acquired from existing shareholders
In employee benefit context, shares can be purchased from existing shareholders or newly issued by the company
Trust is controlled by trustees and generally under separate legal ownership
Complex rules govern EBTs as a result of past tax avoidance history
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3. General Provisions Regarding EBTs
Corporate
Finance
General Provisions Regarding EBTs
Can borrow from lenders (with company guarantee) to purchase shares; reliant on company to make contributions to allow for loan repayment
EBTs do not pay tax on assets contributed/gifted to the trust
UK resident trusts are subject to taxes on income and gains generated by assets held
Discretionary nature means no specific beneficiaries are identified upfront
Distributions to beneficiaries normally subject to income tax
Trust is entitled to receive dividends like any other shareholder, but can waive that right to allow for repayment of funds borrowed to purchase shares
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4. Succession Planning Questions
Corporate
Finance
Succession Planning Questions
Do the shareholders want to sell all or a portion of their shares?
When do the shareholders want to exit financially and operationally?
Are the shareholders seeking to maximise value?
Is successor management in place or does it need to be recruited?
How will share purchase be financed?
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5. The EBT and Succession Planning
Corporate
Finance
The EBT and Succession Planning
Sales of shares to an EBT by a shareholder are subject to capital gains tax
EBTs purchasing less than 50% of a company’s shares cannot pay a control premium, reducing the proceeds to the vendors
The EBT is most useful when selling a minority stake in the business in order to reward key management and employees with potential equity upside
If the shareholders are selling control, the EBT is not the best alternative. The Employee Ownership Trust (EOT) provides greater benefits to sellers and employees
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6. EOT vs. EBT as Succession Planning Tool
Corporate
Finance
Selling a controlling interest to an EOT (greater than 50%) qualifies selling shareholders for CGT relief in the tax year of the sale; the EBT does not provide this benefit
The EOT will pay a control price for the shares, while the EBT generally buys a minority stake at a minimum 40-60% lower non-control share value
The EOT is an all-employee plan, with employees eligible to receive income tax-free bonuses of up to £3,600 per employee per annum
Vendor loans that support an EOT in conjunction with a bank loan can be structured on commercial terms
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7. EOT Structure Corporate Finance
The EOT structure is similar to the EBT structure in that the shares are sold to a trust that is required to act in the best interest of the beneficiaries
EOT transactions are often structured with bank debt and vendor loans as part of the acquisition financing structure
Subordinated vendor loans will often have an interest rate of 8-10%, split between cash and accrued interest. These loans are often structured with equity warrants that provide return upside in the form of participation in the increase in share value over time
The EOT is an all-employee plan that provides for income tax-free employee bonuses and stimulates an employee ownership culture that has been shown to improve company performance
If the assets of the trust are distributed to the employees, potentially as a result of a future sale, the employees will all receive an allocation of the proceeds based upon acceptable proportional allocation methodologies
© RM2 Corporate Finance 2016

8. Conclusions Corporate Finance
The EBT is a useful structure for vendors selling a minority stake in their business
It is also a great tool for incentivising and rewarding key managers and employees as it is discretionary in nature and the benefits can be allocated in a targeted, focused manner to a select group
An EBT is rarely the right vehicle for shareholders selling control of a business, as the EOT provides greater benefits to the selling shareholders and employees and can still incorporate other share schemes to target key managers and employees
The EOT is better suited in many cases for use as a succession planning tool. It can pay a control price, provides full CGT relief to selling shareholders in the year control is sold to the trust and provides a significant employee benefit as well in the income tax-free bonuses and potential participation in the trust proceeds in the future
While both structures have their place, the EOT is the better succession planning tool when shareholders sell control of the business
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9. garry.karch@rm2.co.uk or 020 8949 5522 (o) or 07576 914468 (m)
Corporate
Finance
Conclusion
Thank you for your time.
Questions?
Please feel free to contact me with any questions you may have about EBTs, EOTs and Succession Planning following the conference.
or (o) or (m)
© RM2 Corporate Finance 2016